Above the line deductions bring down your taxable income, which brings down your taxes. These deductions include alimony, expenses related to work, student loan interests, health insurance deductions for the self-employed, retirement contributions, and bank charges on early withdrawals from saving accounts.
These deductions are officially referred to as adjustment to one’s income; but they are commonly called deductions because they are deducted from your earnings to arrive at the final Adjusted Gross Income. These deductions are optional, but claiming them goes a long way in reducing your taxable income.
On the IRS Form 1040, three main deductions are included. These deductions include educator expenses, business expenses, and health savings account deductions.
Educator Expenses Deduction: This gives teachers the opportunity to have the amount spent on classroom supplies to go untaxed. This deduction also includes repayment of student’s loans. It is possible to claim up to $250 of the educator expenses. These are untaxed funds that eligible taxpayers, mostly educators, can claim.
Business Expense Deductions: This does not cover all business expenses but applies to some. On the Schedule A, it appears as a miscellaneous deduction and not necessarily as a business expense. It can be claimed by filling either the IRS Form 2106-EZ or the IRS Form 2106. Both forms are available online and can be filled online too. This deduction does not carter for all taxpayers, but for a selected few including performing artists, military reservist, and fee-basis government officials.
Health Savings Account Deduction: This is like a health insurance policy where those that participate therein are allowed to put aside some money which is tax-free, for medical bills. It functions in the same fashion as a retirement fund.
Generally, the above the line deductions have a positive effect on taxpayers as they give funds that are tax exempted. However, there also are deductions below the line; whatever deduction that follows below the gross income are taxable. If there is a deduction of $1,000 above the line, it gives you $1,000 tax exempted income, which reduces your gross taxable income.
The above line deductions can easily be claimed directly on the IRS Form 1040; the taxpayer doesn’t have to go through the hassle of filling out a Schedule A. The secret to claiming deductions is to understand how they work; this will go a long way in lowering your tax bill.